Jeff owns an American put option on 100 shares of ABC stock.The option has a strike price of $32.50 and a September expiration date.The stock has recently been declining in value,currently sells for $27.65 per share,and is expected to continue declining in value.Ignore all costs and taxes.If today is Wednesday,August 14,he:
A)cannot exercise his option even though he would like to do so.
B)should hold his option until September.
C)can exercise his option and earn a profit.
D)should exercise his option today and then sell the shares of stock on the September expiration date.
E)should let his option expire unless the stock price increases above $32.50 a share.

Question

Quizplus · Accepted Answer

Jeff can exercise his option and earn a profit by selling his 100 shares of ABC at the strike price of $32.50 per share even though the current market price is lower. This will allow Jeff to minimize his losses and earn a profit of $32.50 - $27.65 = $4.85 per share. Since there is still time remaining until the September expiration date, Jeff can wait and see if the stock price increases further before selling his shares to potentially earn a higher profit.

Jeff Owns an American Put Option on 100 Shares of ABC